Overview of Fixed Assets Revision Notes for Grade 11 NSC Matric Accounting

Overview of Fixed Assets

Understanding assets in accounting

An asset represents any item that a business owns and manages. These items are expected to provide financial benefits to the business in the future. Think of assets as valuable resources that help the business operate and generate income.

Two main categories of assets

Businesses classify their assets into two groups based on how long they will use them:

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Asset Classification Based on Time

Non-current assets (long-term assets)

These are items that the business will keep and use for extended periods, typically more than one year. They include physical possessions like property, buildings, vehicles and equipment, as well as financial investments.

Current assets (short-term assets)

These are items that consist of cash or can be quickly converted into cash within one year. Examples include stock (inventory), money owed by customers (trade debtors), and actual cash held by the business.

Breaking down non-current assets

Non-current assets split into two main types:

Fixed/Tangible assets	Financial assets
Land and buildings	Fixed assets
Vehicles	Investments
Equipment	Shares in companies

Key term: Fixed assets are also called tangible assets because you can physically touch them.

What makes fixed assets special?

Businesses purchase fixed assets to help generate income over many years. For example, a delivery van helps a business earn money by transporting goods to customers. However, most fixed assets don't last forever - they have a useful life, which means they can only be used effectively for a certain number of years before needing replacement.

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Because fixed assets serve the business over multiple years, accountants spread their cost across those years rather than recording the full expense in the year of purchase. This spreading of cost is called depreciation.

Essential fixed asset concepts

Cost price

The cost price refers to the total initial amount spent to acquire an asset. This isn't just the purchase price - it includes all additional expenses needed to get the asset ready for use, such as:

Transportation costs to deliver the asset
Registration fees (for vehicles)
Installation charges (for equipment)

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Calculating Cost Price

If you buy a machine for R10,000, pay R500 for delivery, and R300 for installation, the cost price is R10,800 (not just R10,000).

Calculation: $\text{Cost Price} = \text{R}10,000 + \text{R}500 + \text{R}300 = \text{R}10,800$

Depreciation explained

Depreciation is the process of spreading an asset's cost across its useful life. Think of it as recognizing that the asset gradually loses value as it's used to generate income.

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Two Key Purposes of Depreciation

Recording expense usage: It shows how much of the asset's value has been "consumed" during a specific accounting period to earn income
Tax benefit: The depreciation amount can be deducted as an expense when calculating taxable income, reducing the tax the business must pay

Two common depreciation methods

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Fixed percentage on cost price (straight line method)

This method calculates depreciation using the same percentage of the original cost price every year. The depreciation expense stays constant throughout the asset's life.

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Diminished balance method (percentage on carrying value)

This method applies a percentage to the asset's remaining value (carrying value) each year. Because the carrying value decreases annually, the depreciation expense also decreases over time.

Accumulated depreciation

Accumulated depreciation represents the total amount of depreciation that has been written off on a specific asset from the date of purchase up to the current date. It tracks how much of the asset's original value has been used up over time.

Carrying value

The carrying value shows what the asset is currently worth in the accounting records. You can calculate it using this formula:

$\text{Carrying value} = \text{Cost price} - \text{Accumulated depreciation}$

The carrying value represents:

The remaining value of the asset
The portion of the asset's cost that hasn't yet been recorded as an expense
The book value that appears on the balance sheet

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Minimum Carrying Value Rule

The minimum carrying value that must be shown in the business records is R1. An asset cannot have a carrying value of R0 while still appearing in the books.

Asset register

An asset register is a detailed record containing information about each fixed asset the business owns. This register helps the business:

Track the current value of every asset
Maintain control over all fixed assets
Make informed decisions about when to replace or dispose of assets
Monitor depreciation calculations for accuracy

The asset register typically includes details such as the asset description, purchase date, cost price, depreciation method, accumulated depreciation, and carrying value.

Worked example: Comparing depreciation methods

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Worked Example: Comparing Two Depreciation Methods

Let's see how the two depreciation methods work differently using the same asset.

Scenario: A business purchases a vehicle on 1 March 20.1 for cash at R200,000. The financial year ends on 28 February. The business uses a depreciation rate of 20% per annum.

Method comparison over three years

Year	Depreciation at 20% on cost price (straight line)	Depreciation at 20% on diminished balance
Year 1 (28 Feb 20.2)	$20\% \times \text{R}200,000 \times 1 = \text{R}40,000$	$20\% \times \text{R}200,000 \times 1 = \text{R}40,000$
Year 2 (28 Feb 20.3)	$20\% \times \text{R}200,000 \times 1 = \text{R}40,000$	$20\% \times (\text{R}200,000 - \text{R}40,000) \times 1 = \text{R}32,000$
Year 3 (28 Feb 20.4)	$20\% \times \text{R}200,000 \times 1 = \text{R}40,000$	$20\% \times (\text{R}200,000 - \text{R}40,000 - \text{R}32,000) \times 1 = \text{R}25,600$

Notice the difference:

With the straight line method, depreciation stays at R40,000 every year
With the diminished balance method, depreciation decreases each year (R40,000, then R32,000, then R25,600)

Balance sheet presentation on 28 February 20.4

After three years, here's how the vehicle would appear in the balance sheet under each method:

Straight line method:

Item	Amount
Cost price	R200,000
Accumulated depreciation	(R120,000)
Carrying value	R80,000

Diminished balance method:

Item	Amount
Cost price	R200,000
Accumulated depreciation	(R97,600)
Carrying value	R102,400

Key observation: After three years, the straight line method has depreciated more of the vehicle's value (R120,000) compared to the diminished balance method (R97,600). This means the carrying value is lower under the straight line method.

Exam tips

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Essential Exam Tips for Fixed Assets

Always show your workings when calculating depreciation - partial marks are awarded for correct methods even if the final answer is wrong
Remember to multiply by the portion of the year if an asset is purchased mid-year
Double-check whether the question asks for the straight line method or diminished balance method
In the balance sheet, always show cost price first, then subtract accumulated depreciation to show carrying value
Make sure you understand the difference between depreciation (current year expense) and accumulated depreciation (total to date)

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Key Points to Remember:

Fixed assets are long-term resources that help businesses generate income over multiple years, such as buildings, vehicles, and equipment.
Cost price includes all acquisition costs, not just the purchase price - remember to add transport, installation, and registration fees.
Depreciation spreads the asset's cost across its useful life and provides a tax-deductible expense for the business.
Two main depreciation methods exist: the straight line method (constant depreciation each year) and the diminished balance method (decreasing depreciation each year).
Carrying value equals cost price minus accumulated depreciation and represents the asset's remaining book value - it must never fall below R1 in the records.

Overview of Fixed Assets (Grade 11 NSC Matric Accounting): Revision Notes